Measuring the Welfare of Intermediation in Vertical Markets

Abstract

We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products' equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is used to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged.

Intermediaries and product quality in used car markets

“…There has been growing interest from empirical researchers in analyzing the role of intermediaries, but most of these studies focus on intermediaries' roles of resolving search frictions. Recent examples include Hendel, Nevo, and Ortalo-Magné (2009), Gavazza (2016), Salz (2017), and Donna et al (2018). One exception is Galenianos and Gavazza (2017), who estimate a model of cocaine buyers and sellers and show that reputation concerns help support an equilibrium where the dealer offers high-quality drugs in the presence of asymmetric information.…”

Simultaneous Search for Differentiated Products: The Impact of Search Costs and Firm Prominence

“…For example, recent work by De Los Santos et al (2012) and Honka and Chintagunta (2017) has shown that, for books and car insurance sold online, observed consumer search patterns are consistent with simultaneous search. 1 Furthermore, because search decisions do not depend on search outcomes when searching simultaneously, obtaining closed-form expressions for purchase probabilities and market shares is relatively easy and this has made models of simultaneous search for differentiated products popular in recent empirical work (see, e.g., De Los Santos et al, 2012;Honka, 2014;Moraga-González et al, 2015;Pires, 2016;Ershov, 2018;Murry and Zhou, 2020;Lin and Wildenbeest, 2020;and Donna et al, 2019).…”